Default leads to legal woes for API

Trying to recover money from a defaulted loan has led to legal hot water for Augusta Progress Inc.

Comment

By Kent Bush

Butler County Times Gazette

By Kent Bush

Posted Mar. 15, 2014 at 6:00 AM

By Kent Bush

Posted Mar. 15, 2014 at 6:00 AM

Augusta

Trying to recover money from a defaulted loan has led to legal hot water for Augusta Progress Inc.

Augusta Progress Inc. is an economic development group established in 1992 to support economic growth in Augusta.

The group was initially begun with a $25,000 per year stipend from the City of Augusta to recruit businesses into the city. There were some major success stories along the way.

One of the first victories for the group was to lure in an aircraft parts company called Tri-Star Aerospace with the help of Dalton Patterson. API secured a loan and built the building to fit Tri-Star’s needs and leased the building back to them for five years. When the company left Augusta at the end of the lease, API sold the building to DJ Engineering. That is where some of the group’s stockpile of money came from.

The other contributor to API funds came when the group sold the final four lots in the Industrial Park. They had acquired the land in a grant from the city.

The group sat dormant for almost a decade after the 1998 flood and before it was brought back to life in 2007.

In its more recent existence, part of the role API has served has been as a lender of last resort for businesses hoping to locate in Augusta but are unable to secure traditional financing.

One of those businesses was Cinnamon Bakery and Caffé. API loaned proprietors Steve and Stephanie Compton $15,750 to help open the business. As part of the loan agreement, some of the kitchen equipment was put up as collateral.

The company defaulted on the loan and closed the business last year. At API’s December meeting, the board of directors asked David All – a voting member and acting attorney for the group – to file a claim against the Comptons asserting API’s claim to the equipment.

There was a problem though. The equipment was up for auction by the owner of the building, Mike Huddleston. Huddleston had told members of the API board the Comptons sold him the equipment in lieu of back rent they owed.

The board believed they had a lien against the property and filed a claim on Feb. 13, 2014 and District Judge Mike Ward entered a journal entry on behalf of API for $14,817.81 – the remaining balance on the loan. One of the points in the case was API had secured a lien on the equipment set forth in the UCC filing and the loan agreement had stated the Comptons could not “encumber, in any way, the collateral conveyed in this agreement.” In fact, one provision of the loan agreement directly states, “Said collateral shall not be pledged as a security for any indebtedness incurred by Cinnamon Bakery and Caffe without the express written consent of API.”

Page 2 of 3 - But that UCC filing is where the legal issues arise in this situation. API didn’t file the UCC claim until Oct. 9, 2013. About a week after the summary judgment was entered in favor of API, Huddleston filed a motion in the case seeking not only relief from the judgment but also sanctions against API and All because of their handling of the situation.

Huddleston claims API knew he owned the property in question and neither he nor his attorney, David Eron, were included in API’s action. Huddleston’s motion claims he owned the kitchen equipment because the Comptons sold it to him in lieu of back rent in May of 2013. His motion points out API did not perfect its lien on the equipment in a timely fashion.

The motion goes on to accuse All and API of committing fraud upon the court in obtaining the summary judgment of Feb. 21.

At the December meeting of the board, the fact Huddleston was claiming ownership of the equipment and planning to regain his losses through an auction were discussed. However, because of the language of the original loan agreement, board members believed the Comptons had no right to sell the equipment to Huddleston.

Huddleston’s motion accuses All of wrongdoing.

“Clearly he knew that Huddleston held a claim to the property prior to filing this action, but elected not to inform the court or to notify Mr. Huddleston of the legal proceeding,” the motion states.

Huddleston is asking for sanctions against API and All in the amount of $3,700 plus fees and court costs as well as “an amount sufficient to deter further such conduct.”

After the original motion filing, Eron filed another motion Feb. 27, 2014 to convert the action to Chapter 60 which means it would be heard in district court rather than just in front of a magistrate. Huddleston asked for the case to be moved to district court because of the fraud he alleges took place during the action by API.

API held a special meeting last Friday to address the counter-claims by Huddleston. At that time, more problems could have developed for the board due to Kansas Open Meetings Act regulations in how the meeting was conducted.

The only action taken at the meeting was to hire Darren Patterson as co-counsel along with All to help defend All and the board in this action.

When Friday morning’s meeting began, All made a motion to go into executive session. API is made up of general members, elected board members and ex-officio members. When the ex-officio and general members started to leave the meeting room to allow the executive board to meet in private session, All amended his motion to request that Assistant City Manager Josh Shaw, and Joe Goedert – both general members – and ex-officio member David Alfaro join the elected members in the private meeting.

Page 3 of 3 - When general member Sue Jones – an Augusta City Council member – arrived, she was not welcomed into the executive session.

The Kansas Open Meetings Act (KOMA) does not allow observers into executive session. Typically, a person would have to have material information to add to the discussion in order to be included in private meetings.

In the past, there has been discussion as to whether KOMA applies to API meetings. City staff has viewed the board as a general non-profit that voluntarily operated under the KOMA guidelines but was not required to.

However, during the Jan. 21, 2013 Augusta City Council meeting, when Huddleston was still serving as a City Council member and All was acting as Augusta’s city attorney, All told Huddleston he believed API is a subordinate body of the city council and would be required to operate under KOMA guidelines.

According to the minutes from that meeting, “Huddleston stated that in the LKM’s December magazine, the legal forum discussed subordinate bodies and the Kansas Open Meetings Act (KOMA). Huddleston stated that article would indicate that API would be subject to KOMA. Mr. All agreed… Huddleston asked if they would be subject to serial meetings. Mr. All stated they would, but that they are an organization that is working continually outside of meetings but with only two or three members at a time.”

The articles of incorporation for API, filed with the Kansas Secretary of State in 1992, show city officials – including the mayor, city manager and assistant city manager - were a part of the original board. That could indicate that API, at least at its inception, was designed to be an arm of the city.

County Attorney Darrin Devinney has been asked to weigh in on whether API is required to follow KOMA rules and, if so, were those rules violated Friday when some members were allowed to remain in the meeting and others were asked to leave.